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Good credit is your shield against unfair risk policies

Consumer Action (CA) examined 140 cards from 45 issuers for its new Credit Card Survey, and found that many banks, allegedly in fear of potential customer defaults, are immediately charging late fees on payments not received on the due date and high punitive interest rates after just one or two late payments or a change in credit performance with other creditors.

"Banks seem to be saying that if there is even a shadow of a doubt that a cardholder might not pay, they are going to get a premium on their money while they still can," said Linda Sherry, who conducted this year's survey with the help of Sol Carbonell, Janice Kohn and Annie Tran. "We believe the real purpose of these policies is to maximize revenue at the expense of those who are least able to afford it."

Sherry points out that 26 (58%) of surveyed banks now have a cut-off time for late payments on the due date. "If you are even five minutes late, it can cost you up to $39. Banks should be forced to consider postmarks when posting payments. If the Internal Revenue Service can do it, why can't credit card issuers?"

This year, 48% of surveyed issuers are using tiered late payments tied to the cardholder's balance or the number of annual late payments. Last year 20% of issuers had adopted this strategy.

Late fees head up

The highest late fee found last year was $38, charged by US Bank to customers who paid late twice in the same year. This year, three major banks have $39 late fees at certain balance levels. Bank of America and MBNA charge a $39 late fee on balances of more than $1,000 and Providian on balances of more than $200.

Only 10 surveyed banks (22%) don’t hit you with a late fee on the day after the due date. The handful of banks that are at all lenient allow from one to 25 days.

Credit card fees cost cardholders about $13 billion per year. Citgroup, the largest issuer of credit cards, recently announced its 2004 first-quarter earnings had risen 29%, bolstered in large part by higher fees on credit cards

Universal default

An increasing number of issuers use universal default or “insecurity” policies to increase interest rates based on their customers’ credit performance with other creditors. Companies review customer credit reports on a regular basis, and 44% of the banks surveyed use this information to identify so-called risky cardholders and raise their interest rates, even if they have never made a late payment. Last year’s survey found 39% of banks with universal default policies.

“Your credit card company might use the fact that your mortgage payment was delayed to justify a rate increase,” noted Sherry. “While your card company has always checked your credit on a regular basis, it’s now coming down hard when it senses a negative change in your credit.”

Penalty rates

Late payments will cost cardholders a higher “penalty” rate with 85% of the issuers surveyed. CA found 38 issuers with penalty rates ranging from 12% (Arkansas National) to 29.99% (Providian), with an average penalty rate of 22.91%—1.38 percentage points higher than last year’s average.

Of these issuers, 31% said a penalty rate could be triggered by just one late payment, while 35.5% said that it would take two late payments in consecutive months or in a six-month period to cause a rate increase.

The average interest rate on all surveyed cards was 11.97%—a drop from the 2003 average of 12.19%. Surveyors found 99 variable rate cards, with an average rate of 12.12%. The average rate on fixed-rate cards was 11.60%. Just over half (51%) of the surveyed institutions will not provide a firm annual percentage rate (APR) until they have screened the applicant’s credit history. Only 39% of surveyed issuers had this policy last year.

Cash advance APRs

Of the 140 cards surveyed, 73% have a higher APR for cash advances taken with the card. In addition to interest beginning to accrue immediately on cash advances, 103 cards charged higher rates on cash balances—the average cash rate was 19.50%.

Forty-three banks (95.5%) have over limit fees ranging from $10 to $39 each month that the account balance remains higher than allowed. The average over limit fee this year is $29.13 as compared to $28 a year ago. (Over limit fees may be charged in each month that the balance exceeds the cardholder’s credit limit.)

Of the 140 cards, 95 (or 68%) have no annual fees. Annual fees range from $15 (Helena National Bank) to $99.95 (Eufora/Infibank). The average annual fee this year is $37.33—an increase from $35.67 in 2003.

Introductory rates

Lower introductory (“teaser”) rates are offered on 78% of the cards. There are 53 cards offering initial interest rates of “zero per cent” on purchases and/or transferred balances for periods ranging from four months (Fifth Third Bank) to 15 months (Chase Bank of NY and Huntington Direct Bank). (A list of all introductory rates at the time of the survey appears on the section "Introductory rates".) On transferred balances, American Express, Chase Manhattan Bank and National City Bank offer a low rate for the “life of the balance,” or until the balance is paid.
(Surveyed issuer US Bank has a $29 late fee, but bumps it up to $38 for cardholders with two late payments in a 12-month period.)

Foreign exchanges

If you use a credit card overseas, MasterCard, Visa and American Express add a “currency conversion fee” to the charge when converting it to dollars. On all Mastercard and Visa charges the amount is 1%; American Express charges 2%.
In addition to the MasterCard and Visa charge, many banks add another fee of their own. This year 26 of surveyed issuers are adding their own currency conversion charges that are separate from MasterCard and Visa fees. The number has grown since last year’s survey, which found 17 issuers including American Express with currency conversion fees. However, the average fee has dropped from 1.86% to 1.56%.

The bank charges range from 1% to 3% of the amount converted, which does not include the MasterCard/Visa commission of 1%. “Of the large issuers, we found that Capital One, Fleet Bank and MBNA do not add a charge of their own,” said Sherry. If you have not been prescreened, nineteen (almost 39%) of the surveyed institutions won’t quote you a firm APR until they’ve checked your credit history. This rule applies to 33 of the cards surveyed this year. The widest range of rates—6.50%-19.25%—is offered by Wells Fargo Bank, although at 23.99% Providian has the highest rate in the survey for risky borrowers.

More than half the cards (53%) surveyed require cardholders to pay only 2% of the monthly balance each month. Last year’s survey found just 43% asking for only 2%.

* American Express offers fixed and variable rates on its Optima card so it appears under both categories.
** Lower rates are available for customers with good credit.

Getting credit for your credit

In the 2004 Credit Card Survey, 23.5% of all surveyed cards offer rewards such as cash rebates, points toward merchandise or airline mileage. The average interest rate on rewards cards surveyed was 12.55%, about half a percentage point higher than the survey average.

Of the 33 rewards cards surveyed, 13 (or 39%) have annual fees ranging from $19 (Capital One GoMiles) to $90 (US Bank World Perks Signature Card), with an average fee of $49.92.

The survey includes 18 cards offering points toward air travel. No-fee exceptions are MBNA’s World Points program, which can be added to most of its cards at no cost, and Bank One/First USA’s Value Miles Platinum.

Make sure the card allows you to use airlines that have direct routes to the places you want to go. While many cards allow your points to be redeemed on any major airline, some programs are limited to certain airlines and their partners.

Not created equal

In most cases, the miles you earn with a card that is not affiliated with a specific airline cannot be combined with the miles you have earned in any carrier’s frequent flyer program. However, if you are a member of an airline’s frequent flyer program and use your credit card award to travel on that airline, you will earn miles for the trip.

Another big difference between mileage points cards and airline-sponsored frequent flyer mileage programs is that you must purchase tickets with 21 days advance notice. In most cases the airline affinity cards allow you to redeem miles on short notice if a seat is available.

The survey includes 11 cards that offer cash, rebates or merchandise rewards. These cards rarely have annual fees, although one, Metropolitan National Bank’s Cash Rewards Platinum Card, comes with a $40 fee.

According to some estimates, up to three-quarters of U.S. credit cardholders have cards affiliated with an awards program. In the last four years, the number of people with rewards cards has doubled.

On-time payments

Rewards cardholders must pay their bills on time, as virtually every credit card rewards program invalidates your points if you’re late with a payment or go over your credit limit. Some companies, like American Express, charge a $29 fee to reinstate points forfeited by late payments. In most cases the rewards disappear within 30 days to six months after you close the account.

You usually get one mile or point for every $1 charged, but some cards offer 2 points for each $1 on transactions at grocery stores or gas stations or tickets purchased on affiliated airlines. This excludes cash advances, fees, finance charges and merchandise.

It is common to find expiration dates on rewards of from three to seven years. Read the fine print before applying for a card. For instance, rebates on Citibank’s Conoco Card expire if not redeemed in six months.

Annual limits

Most cards have monthly and annual mileage caps that limit the miles you can earn in one month or one year. You may be exempt from caps if you are a frequent flier. Even if your card promises unlimited mileage, it may dole out only 1 mile for every $2 charged after you reach a certain annual limit.

Terms vary among cards. For instance, it may take fewer points to earn a round trip ticket with some cards. Most cards require at least 25,000 points for a domestic round-trip ticket. But on Bank One’s Southwest Airlines Rapid Rewards, you need 19,200 points while Jupiter Bank’s Orbitz Card requires 20,000.

Capital One’s GoMiles uses the lowest available fare on a given route to figure how many points you need. For example, if the lowest fare on a route is $300, the amount is multiplied by 90 to arrive at the number of points required—in this case 27,000.

True cost of points

It pays to consider how much you are actually forking out for points. To charge $25,000 and pay annual fees of up to $90 just to get a free round trip domestic flight doesn’t make financial sense for many people. You might be better off using a cash-back card like American Express Blue Cash, which pays you 3% of most purchases made with the card.

Since a cross country flight can cost as little as $200-$300, charges of $10,000 would cover the trip. If you can buy a low cost fare, save your points or mileage redits for a more expensive flight.

To gain the most from the use of a rewards or mileage card, use the card for everyday purchases that you can pay in full each month so that interest payments don’t cancel out your award.

Cash rebate cards typically send a check to the cardholder only when the credit has reached a certain amount. For instance, if your card offers a 1% rebate, you cannot collect until you have spent $2,500 on the card and your rebate is at least $25.

In most cases, cash rebates cannot be used as credit against the account balance, although gasoline company rebates usually pay only when you make future purchases. With Fleet Bank’s Savings Bond Card you can earn one $50 Series EE U.S. Savings Bond for each $2,500 in purchases, with a limit of 10 bonds per year. On some cards, the reward is tied to one company. The GM Card, offered by HSBC Bank USA, allows cardholders to earn a credit for 5% of most charges during a period of up to seven years, to be used toward the purchase of a new GM vehicle.

The MBNA LLBean Card offers free regular shipping and monograms on merchandise from the Maine catalog merchant, but freight charges apply to all furniture purchases.
Rebates may be limited by the amount you spend in each billing cycle, or may be tied to a tiered schedule. In some cases, rebates are higher on certain purchases, such as airline tickets or shopping at non-chain grocery stores, pharmacies or hardware stores.
For online comparisons of travel rewards cards, visit Frequentflier.com or Insideflyer.com.

Make your rewards card pay

Ask if the annual fee can be waived the first year.

Use your rewards card for everyday purchases that you can pay in full each month. Use a low rate card for carrying balances.

Pay on time—you can lose your miles or rewards if you make a late payment.

You may get a mileage bonus for referring new members.

Look for cards that offer free or low-priced companion tickets.

Choose a card with a generous expiration policy on points and miles and no blackout or seat restrictions.

High court rules that over limit fees are not finance charges

In April, the Supreme Court unanimously ruled that credit card over limit fees are not finance charges—they can be posted as separate transactions and as such, added to balances subject to finance charges.

The court considered only how over limit charges may be listed on billing statements, not the legitimacy of such fees.

MBNA customer Sharon Pfennig complained that over limit charges are really a cost of using the card and should be listed as finance charges. She sued under the Truth in Lending Act, a federal law requiring that consumers who borrow money be given certain information about the loan or extension of credit.

Pfennig’s suit charged that MBNA allowed her to exceed her credit limit and imposed a $29 fee for every month her balance remained over the original limit. Instead of listing the fee as a finance charge, the company posted it as a new purchase on which she had to pay additional finance charges.

“It is perfectly reasonable to characterize an over limit fee not as a [finance] charge imposed for obtaining an extension of credit over a consumer’s credit limit, but rather as a penalty for violating the credit agreement,” Justice Clarence Thomas wrote for the court.

MBNA and Household Credit Services had asked the high court to overturn a lower court ruling in favor of Pfenning. That court denied her right to sue MBNA for financial damages but allowed her to seek a declaration that the fee was not disclosed properly under Truth in Lending.

Beware of two-cycle billing

While the vast majority of credit card banks surveyed by Consumer Action use the standard one-month method of calculating interest charges, the survey found that Bank One and Discover use a billing method that calculates interest on the two previous months’ balances. This can result in higher interest charges for cardholders who switch from paying in full to carrying a balance from month to month.

Nine of the cards surveyed this year are issued by Bank One and its subsidiary First USA. Of the nine cards, only the AARP, United Plus and Southwest Airlines Rapid Rewards cards don't feature two-cycle billing.

Fewer credit card offers in the mail

You’re probably receiving fewer credit card offers, according to industry tracker Cardweb.com. It said that direct mail credit card offers dropped to 4.3 billion in 2003 after peaking at 5 billion two years ago. On average, 69% of U.S. households received 4.8 offers per month, compared to 75% of households receiving 5.1 offers per month in 2002. Most (90%) direct mail offers come from the 10 largest card issuers.

Fewer paying in full

According to a March study by the Cambridge Consumer Credit Index, 39% of the more than 1,000 people surveyed said they paid off their monthly balance in full, down from 43% a year ago.

Definitions:
Annual Percentage Rate: The finance charge expressed in terms of an annual figure, a percentage of the amount owed. APRs listed are for purchases—cash advances often carry a higher APR..

Notes:
• Survey conducted 2/16/04 through 3/31/04.

• Survey does not include introductory or promotional (teaser) rates. (See the chart "Introductory rates" for introductory rates at the time of the survey.)

• For variable rates, the APR may not reflect recent changes in the index, such as the Prime Rate, Federal Discount rates or LIBOR. (The Prime Rate was 4.00% during this survey. Bankrate.com lists all current index rates.)

Grace Period: The number of days after the close of the last billing cycle in which you can pay off new bills without being charged interest—if there is no prior balance. Unless otherwise noted, cards have a 25-day grace period.

Grace period: 20-25 days. Cash advance fee: 4%/$5 min. Late fee: $29/$38***. Over limit fee: $35. APR is Prime + 3.99%-12.99%. *Fee is waived if you make at least one yearly purchase. **APR based on applicant’s credit history. ***If late twice in one year.

Platinum

$40*

7.99%-16.99%** V

All terms same as above, including *fee waiver. **APR based on applicant’s credit history.

Cash Rewards Platinum

$40*

13.99% V

All terms same as above, including *fee waiver. Users earn 1% cash reward.

Travel Rewards Platinum

$55

13.99% V

All terms same as above, except annual fee waiver. One travel point per $1.

National City Bank - Elite Card
800-282-7541, nationalcity.com

None

9.90% or 11.90%* F

Cash advance fee: $3/$50 max. Late fee: $15<$25; $25<$150; $35>$150. Over limit fee: Same as late fee. *APR based on applicant’s credit history.

People’s Bank - Long Island Sound
877-525-9248, peoples.com

None

16.90% F

Cash advance fee: 3%/$5 min. Late fee: $35. Over limit fee: $35.

Platinum

None

9.99% V

All terms same as above.

US Ski Team Platinum

None

14.99% F

All terms same as above.

Providian - Platinum
800-647-8641providian.com

None

9.99%-19.99%* V

Cash advance fee: 3%/$10 min. Late fee: $19<$200; $39>$200. Over limit fee: Zero if you exceed balance by less than 2%; >$35, fee is 2% of over-limit balance. APR is Prime + 5.99%-15.99%. *APR based on applicant’s credit history.

Pulaski Bank - Standard/Classic
800-560-5834, pulaskibank.com

$35

4.75% F

No cash advance fee. Late fee: $29. Over limit fee: $29.

Gold

$50*

4.75% F

All terms same as above. *Gold card has higher credit limits.

Retailers National Bank
- Target Card
(Apply at Target stores.)

None

9.90%-18.90%* F

Cash advance fee: 3%/$5 min. Late fee: $15<$150; $29, $150-$1000; $35 >$1000 or if account is subject to Penalty Rate. No over limit fee. *APR is based on applicant’s credit history.

APR is Prime + 5.15%-16.75%. Other terms same as above. *APR based on applicant’s credit history.

Prime Rate Card

$79

4.00% V

APR is Prime Rate. Other terms same as above.

Substitute card numbers offered

To allay cardholders’ fears about fraud when shopping on the Internet, credit card issuers Citibank, Discover and MBNA will provide substitute account numbers for one-time use. The companies believe that using a substi-tute number can increase shoppers’ confidence online as well as avoid potential liability for fraud. After registering your card with the company, substitute account numbers will be provided when you need them. The numbers can be used at one merchant for a single purchase or for a service with a recurring monthly charge.

American Express, the first to offer single-use account numbers in 2000, recently dropped its program, stating that it believes existing credit card liability safeguards work well enough.

CA hosts seminar for Midwest community groups

In early May, Consumer Action and its MoneyWi$e financial literacy partner Capital One held a financial training in Chicago designed to teach local community groups how to talk to their clients about money and financial management. The MoneyWi$e materials created by Consumer Action were used to teach fundamentals of basic banking, budgeting, credit, bankruptcy and talking to teens about money. The event was attended by more than 60 Midwest non-profit community groups.

Featured speakers for the event included Elizabeth L. Handlin from the Federal Reserve Bank of Chicago, who discussed Money $mart Week, a local event designed to promote financial education programs. Rolando Berrelez of the Federal Trade Commission gave a popular session on how to avoid identity theft. Lance Raphael, Esq. of the Consumer Advocacy Center, P.C., a consumer attorney, had to stay for lunch in order to answer all the questions from attendees following his session on consumer rights. On the second day, a panel of non-profit representatives who have received funding from Consumer Action to teach the MoneyWi$e program shared their best practices for achieving financial literacy in diverse communities.

“We applaud the efforts of these Midwestern organizations to provide support and education in their communities,” said Ken McEldowney, Executive Director of Consumer Action. “This is just one way we can assist community groups to provide financial education in their communities.”